This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors’ cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.

The banking lobby is resisting efforts to overhaul the $605 trillion market for derivatives that don’t trade on exchanges. Although a lack of transparency and hidden leverage in this over-the-counter market fueled systemic weakness in 2008, regulators and politicians haven’t delivered some basic improvements.

The Club-Med meltdown may persuade them to act. For years, Greece wrote large derivatives contracts with banks, mostly associated with sovereign-bond issues. These derivatives likely have a feature that now makes them particularly worrying for banks, lax “margin” requirements

At 9:30pm on Sunday, September 21, 2008, Goldman Sachs was saved from imminent collapse by the announcement that the Federal Reserve would allow it to become a bank holding company – implying unfettered access to borrowing from the Fed and other forms of implicit government support, all of which subsequently proved most beneficial. Officials allowed Goldman to make such an unprecedented conversion in the name of global financial stability. (The blow-by-blow account is in Andrew Ross Sorkin’s Too Big To Fail; this is confirmed in all substantial detail by Hank Paulson’s memoir.)

We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November. These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets. When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings. But a single rogue bank can bring down the world’s financial system.

if volcker is able to break up too big to fail (via the current unlimited fed backstop of banks like goldman sachs) get ready for another market crash and the dollar to rally. long term we’re gonna be better off but its going to be painful for usa + world in short term.

goldman’s special ‘bank holding company’ status gives them the following: As a result of the Global financial crisis of 2008, many traditional investment banks and finance corporations such as Goldman Sachs, American Express, CIT Group and General Motors Acceptance Corporation[3] successfully converted to bank holding companies in order to gain access to liquidity and funding. This arrangement allows them access to the Federal Reserve’s discount window and benefit from the Troubled Asset Relief Program, but the companies are now subject to more regulation and their ability to have exposure to risk will be limited.

excerpt from volcker article 1:

Goldman Sachs and other banks should give up their bank status if they want to avoid the ban on proprietary trading proposed by the White House, Paul Volcker, head of President Barack Obama’s Economic Recovery Advisory Board, said.

“The implication for Goldman Sachs or any other institution is, do you want to be a bank?” Mr Volcker said in a video interview with the Financial Times. “If you don’t want to follow those [banking] rules, you want to go out and do a lot of proprietary stuff, fine, but don’t do it with a banking licence.”

great grilling of hank paulson by larry kudlow around causes of crisis. specifically, larry’s theory is that “conveniently timed” changes to mark-to-market accounting in 2007 sowed seeds of the 2008 collapse. Markets collapsed over 2007/2008, and then and only then rallied when mark-t-market accounting was changed in March 2009(day that market bottomed and then went on 60% rally).

you could also take a gander that golden sachs probably bet against the whole market knowing that mark-to-market changes in 2007 would lead to issues down the road.

no matter what caused crisis, paulson again looks like a freaking bumbling idiot that shouldn’t be calling any shots….Vodpod videos no longer available.